Question 1 "Capital" is sometimes defined as funds supplied to a firm by investors. O True O FalseQuestion 2 4 points Save Answer Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D 1 = $0.67; P o = $60.00; and g = 8.00% (constant). What is the cost of equity from retained earnings based on the DCF approach? O a. 9.75% O b. 9.21% O c. 9.12% O d. 11.40% O e. 8.11%Qustlon 3 4 points Save Answer Exhibit 10.1 Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the rm's weighted average cost of capital, The balance sheet and some other information are provided below, Assets Current assets $38,000,000 Net plant. property, and equipment $,M,w Total assets $&,M.M Liabilities and Equ_ity_ Accounts payable $10,000,000 Accruals _$_9,.M Current liabilities $19,000,000 Long-term debt (40.000 bonds, $1.000 par value) $,,m Total liabilities _$5_9,w,m Common stock (10,000,000 shares) $30,000,000 Retained earnings _$5_0,@,M Total shareholders' equity $,w,m Total liabilities and shareholders' equity $&,M,M The stock is currently selling for $12.25 per share, and its noncallable $1,000.00 par value, 20-year, 7.00% bonds with semiannual payments are selling for $1,044.07. The beta is 1.15, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years, The rm's tax rate is 40%. Refer to Exhibit 10.1. Based on the CAPM, what is the rm's cost of equity? 0 a. 12.40% 0 b. 11.41% 0 c. 10.66% 0 d. 13.02% 0 e. 12.03% Question 4 4 points Save Ar Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: I RF = 4.10%; RP M = 5.25%; and b = 0.60. Based on the CAPM approach, what is the cost of equity from retained earnings? O a. 7.18% O b. 7.25% O c. 5.51% O d. 6.67% O e. 6.38%Question 5 4 points Save Answ Teall Development Company hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D 1 = $1.45; P o = $34.00; and g = 6.50% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? O a. 13.03% O b. 10.87% O c. 10.76% O d. 10.55% O e. 9.69%Question 6 The component costs of capital are market-determined variables in the sense that they are based on investors' required returns. O True O FalseQuestion 7 When working with the CAPM, which of the following factors can be determined with the most precision? O a. The market risk premium (RPM). O b. The expected rate of return on the market, IM. O c. The most appropriate risk-free rate, IRF. O d. The beta coefficient, bi, of a relatively safe stock. O e. The beta coefficient of "the market," which is the same as the beta of an average stock.Question 8 Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? O a. Preferred stock. O b. Retained earnings. O c. Accounts payable. O d. Long-term debt. O e. Common stock.Question 9 4 points Save Answer The text identifies three methods for estimating the cost of common stock from retained earnings: the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. Since we cannot be sure that the estimate obtained with any of these methods is correct, it is often appropriate to use all three methods, then consider all three estimates, and end up using a judgmental estimate when calculating the WACC. O True FalseQuestion 10 The lower the firm's tax rate, the lower will be its after-tax cost of debt and also its WACC, other things held constant. O True O FalseQuestion 11 The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt. O True O FalseQuestion 12 4 points Save Answ You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.50%. The firm will not be issuing any new stock. What is its WACC? O a. 9.88% O b. 7.59% O c. 11.16% O d. 10.98% O e. 9.15%Question 13 A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT? O a. If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price. O b. The bond is selling at a discount. O c. If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price. O d. The bond's current yield is greater than 9%. O e. The bond is selling below its par value.Question 14 4 points Save Ansv A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline. O True O FalseQuestion 15 4 P Malko Enterprises' bonds currently sell for $1,020. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield? O a. 6.62% O b. 6.40% O c. 7.35% O d. 6.91% O e. 8.46%Qustion 16 4 points Saw There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower. 0 True 0 False Question 17 The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity. O True O FalseQuestion 18 What is the dual mandate of the FOMC? O A. Price stability and economic growth O B. Price stability and low inflation O C. Economic growth with low inflation O D. Economic growth with higher pricesQuestion 19 The FOMC raised the Federal Funds rate at the last meeting. O True O FalseQuestion 20 What is the Current yield of a 30 year U.S. Bond that was issued 12 years ago, has a coupon rate of 0.04, and is currently selling for $1,030? Enter 4 decimals, Ex. if it is 6.34%, enter it as 0.0634. Question 21 If a bond is selling at a premium, that is at above $1,000, it must have a negative capital gains yield. 0 True 0 False Qustion 22 4 points Save Answ Based on the corporate valuation model, Morgan Inc's total corporate value is $200 million, The balance sheet shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity, The company has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share? 0 a. $4.12 0 b. $3.88 0 c. $3.80 0 d. $4.00 0 e. $3.36 Question 23 Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $57.50, what is its nominal (not effective) annual rate of return? O a. 5.84% O b. 7.03% O c. 6.75% O d. 6.96% O e. 8.56%Question 24 4 points Save A A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value. O True O FalseQuestion 25 If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold. O True O False